Lord Wolfson, boss of the Next retail chain, has warned of a "very uncertain" outlook for the high street in 2012, with any boost from lower inflation outweighed by the reluctance of banks to lend and rising unemployment.

His comments came despite the company reporting a healthy 5% rise in underlying profit to £570m last year, thanks to its directories and online business, where sales rose 16% to more than £1bn.

Wolfson said the decision of several mortgage companies to increase their rates even though the base rate was unchanged laid bare the ongoing credit squeeze that would inevitably constrain discretionary spending. "Accordingly, we are budgeting conservatively," he said.

Wolfson added: "Credit availability remains very tight for business and consumers alike … credit conditions are unlikely to ease." Wolfson cited the regulatory clampdown on banks, forcing them to hold more capital, as the main reason for the squeeze.

He said: "Employment took a turn for the worse in the middle of last year and currently the creation of jobs in the private sector is only barely keeping pace with reductions in public sector employment. So it looks as though there is little chance of increased employment improving the consumer economy."

But it's not all doom and gloom, Wolfson said, because inflation has begun to fall and should ease further, meaning that by the third quarter of 2012, consumers should see their incomes rising broadly in line with prices – "marking a welcome end to deflation in real earnings".

Looking back to 2011, he said Next had done remarkably well at a time when consumer demand had been held back by a combination of high inflation, low wage growth and limited availability of credit.

Next's costs rose as soaring cotton prices and overseas wage inflation were passed on by manufacturers, forcing the retailer in turn to push up prices to customers by 7%. But falling like-for-like sales in the shops were offset by brisk business at the directories and online operation, as well as by the introduction of additional floor space. Retail space in stores was increased by nearly 7% and the size of the estate grew from 525 shops in January 2011 to 536 at the same time this year.

Profit at the retail chain was down 1.6%, but up 18.4% to £263m for directories. The dividend was raised 15% and the company said it remained committed to returning money to shareholders through share buybacks. During the year, it spent £290m on buybacks, with a further £135m paid out in dividends.

Next said it would continue to invest in its standalone Home stores. It currently has 43 of these home furnishings shops, all of which are said to be "extremely profitable".

Kingfisher, Europe's top DIY retailer, also provided relief for shareholders, reporting better-than-expected results last year. The B&Q owner announced pre-tax profits of £807m for the 12 months to January, up 20%, with the annual dividend improved by 25%.